A weak Q2 GDP print, the downward revision to Q1 and a PBOC seemingly more concerned about the financial stability risks associated with low yields – rather than their root causes – has pushed our latest China forecast for 2024 down to 4.8%.

It is possible that policies aimed at supporting the property market will put the sector on a firmer foundation in time, but June’s data largely confirmed the ongoing malaise. New starts now appear to be trending down, while house prices continue to fall at a fast pace.

Deposit and borrowing data are consistent with private sector risk aversion that is unlikely to self-correct. Corporate deposits are now shrinking, while household borrowing has fallen close to zero.

Weak demand for funds, high savings and a tepid nominal environment (the Q2 GDP deflator remains in negative territory at -0.7% year over year) have combined to push long-dated yields down by around 50bps since November.

But rather than address the macro backdrop, the PBOC has intervened to stem the bond market rally. If yields are forced higher – rather than stabilised – this could tighten financial conditions going forward. 

The Third Plenum seems to suggest little change in the authorities’ priorities. Expanding migrants’ access to social services is welcome, while fiscal reforms could reduce risks. But security remains the ‘foundation’ for China’s technology-focused modernisation, both of which will continue to amplify tensions with the West. 

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